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Why is the Dairy Sector Suffering Globally?

13 August 2015

ANALYSIS - The global dairy sector is in turmoil with the price of production outstripping farm gate prices in many countries, a glut of milk on the market and stagnation in traditional and expanding export markets.

In Europe, it has been seen as a specifically European problem marked by high profile protests.

French farmers have been burning tyres in the road, dumping manure to block highways and preventing imports from Germany.

In the UK, the protests reached their peak with farmers taking dairy cattle into supermarkets to highlight the depth of feeling and the depth of their financial plight.

Much of the blame in the UK has been placed firmly at the doors of the supermarkets, who the farmers say are not paying a fair price for the product.

The supermarkets have become the target in the UK because more than half the milk produced in the UK is sold as fresh liquid milk and 85 per cent of the milk produced in the UK is processed and sold in the UK.

Why are farmers protesting?

The farmers are protesting that they are facing more and more cuts with the average milk price farmers received in June this year 23.66 pence per litre (ppl).

A year ago this price was 31.66ppl.

Some farmers are now receiving milk prices of around 15ppl, while the average cost of production is nearer 30ppl.

NFU President Meurig Raymond said: “The situation many of our members are experiencing has become a crisis. In dairy, many milk producers have seen price cut after price cut.

“It’s simply not sustainable for any farmer to continue to produce milk if they’re selling it at a loss.

“The plight of many farmers has become desperately serious and with no sign that things will improve, we really need urgent action from retailers, the food service sector and processors to show commitment to British dairy farmers.

“I also want to see Government agencies doing more to support the public procurement of British food.”

The National Farmers’ Union says that since January this year 236 farmers have left the dairy sector because of unsustainable prices and it says that this trend is expected to continue.

However, while British dairy farmers are being hit hard by the downturn in prices, the situation is not uniquely British and the British farmers are not necessarily being hit the hardest.

The June EU weighted average milk price stood at €29.99/100kg (22.25ppl), down by €0.55/100kg or 1.8 per cent on the previous month.

Compared to the previous year, the weighted average EU price for June was down €7.57/100kg or 20.2 per cent.

This was a fall of 8.86ppl over the year.

The average UK farm gate price in June stood at €31.87/100kg or 23.64ppl, which was the fifth highest price of any nation in the EU15 after Greece, Finland, Italy and Austria, for the second consecutive month.

The EU15 weighted average price stood at €30.58/100kg or 22.68ppl in June, €0.47/100kg or 1.5 per cent down on May, and was €7.79/100kg or 20.3 per cent lower than in June last year.

The top-five milk producing countries Germany, France, UK, Netherlands and Italy saw an average June price of €31.20/100kg which was a €0.51/100kg or 1.6 per cent down on the previous month.

Prices falling worldwide

This scenario, however, is not just seen in the EU, as prices have been falling all around the world.

The Fonterra Global Dairy Trade auction at the beginning of August showed a fall in the overall GDT Price Index of 9.3 per cent and the falls in prices were seen across the board, except for cheddar, which rose, and lactose that remained stable.

The weighted average price across all products stood at $1,815/tonne.

The biggest fall in the Price Index was for Skimmed Milk Powder (SMP), which dropped by 14.4 per cent to $1,419 per tonne.

Anhydrous Milk Fat (AMF) and Whole Milk Powder (WMP) saw the index fall by 11.7 per cent and 10.3 per cent respectively to $2,253 and $1,590 per tonne.

The US dairy sector reports that milk production is outstripping manufacturing capacity in many areas, leading farmers to dump milk or turn it into animal feed.

The USDA’s June milk production report showed strong milk production growth in Central and Eastern milk-producing states.

But the milk industry in the US said that despite ample milk supplies in these regions, milk and dairy product production are not yet showing signs of outpacing demand growth nationally.

In July, the USDA forecast that milk production for this year would be 1.4 per cent more than 2014.

US average milk prices have risen modestly in recent months, but increases in livestock feed prices are making payments under the Margin Protection Program likely for the May-June period at the highest $8 level.

End to EU quota system lowers prices

The reason for the low prices and the glut of milk on the market can be attributed to several causes.

In the EU, the end of the quota system has helped to boost production, as farmers across the EU geared up to sell on the open market. The acceleration in production in the EU has been gathering pace over about the last three years in anticipation of a better tomorrow in a quota free system,

Germany, for example, had a quota for the final year of the system of 30.225 million tonnes. It actually delivered 31.335 million tonnes.

There was a similar picture across other EU countries with production racing ahead.

For the EU, this could have been sustainable if the global markets had developed as expected.

However, one of the major export markets, Russia, put up the shutters on EU dairy products, among others, in the autumn of 2014 as part of the retaliatory action over sanctions because of Russia’s stance over the crisis in Ukraine.

Russian ban affects global dairy exports

The main EU exporters of dairy products to Russia were the Netherlands, France, Germany, Belgium, Poland and Denmark with more than a million tonnes of milk equivalent exported each and taking more than 70 per cent of the EU exports.

While the EU exports to Russia only account for 1.4 per cent of the EU cow’s milk production, this share was much higher in Finland (22 per cent), Lithuania (14 per cent), Estonia (eight per cent) and Latvia (five per cent).

However, Russia was the destination of 13 per cent of the EU exports in milk equivalent, with the share much higher for cheese and butter at 32 per cent and 24 per cent respectively.

The EU was the main supplier of Russia followed by Belarus, both supplying 80 per cent of the Russian dairy imports in value.

The Russian ban has not only affected EU exports but those from the US, Canada, Australia and Norway and it has seen a dramatic change in the Russian dairy sector.

In the year before the ban, Russia imported 57,000 tonnes of butter. The year following the ban saw that figure fall 7.8 times to just 7,300 tonnes. SMP fell from 45,000 tonnes to 7,100 tonnes and WMP fell from 8,500 tonnes to 2,400 tonnes.

The largest drop came in cheese, which went down from 385,000 tonnes to just 41,000 tonnes.

But according to the chairman of the Russian Milk Union, Soyusmoloko, Andrei Danilenko: “The embargo was really a chance for Russian cheese makers to ramp up production.

“Before the embargo it was difficult to compete with European producers, as the level of state support in the EU was several times higher, so milk, and consequently cheese was much cheaper.”

The “ramp up” of production saw 22.5 per cent more cheese made in Russia, but despite the increase in production profitability is still questionable in Russia too.

"Milk production is still unprofitable and unattractive to investors,” Mr Danilenko said.

However, the loss of the Russian market meant that the EU had to find other markets.

Chinese market dries up

One burgeoning market had also been China, where not only the EU was making inroad but also New Zealand.

At the beginning of this year, the Chinese market suddenly dried up, as the country found it had reached saturation point with imported product and had more than it could cope with.

For New Zealand, in particular, this was a body blow. The country that exports two thirds of its whole milk powder had China As its biggest customer. Shipments in the first five months of 2015 fell by 65 per cent and consequently brought prices down to their lowest since 2009.

This contributed to a plunge in farm gate prices, making the majority of New Zealand’s 12,000 dairy farms unprofitable.

Fonterra slashed the payment to New Zealand farmers to NZ4.40 per kilogram of milk solids in the season that ended on 331 May from NZ$8.40 a year ago. Prices are expected to be kept low as the new season opens, with breakeven at about NZ$5 per kilo.

Exchange rate wobbles

While export markets have been drying up and farm gate prices tumbling around the world, farmers in some countries have also been hit by volatile currency exchange rate.

Prevarication in the US over whether to raise interest rates has put pressure on exchange rates with the dollar falling against the Euro, making the Euro strong against most major currencies. For the UK, sterling has been caught in the shock waves, with the pound to US dollar reaching 1.56.

The high exchange rates have made exports even more expensive and markets more difficult.

Feed prices a positive

One bright spot for EU dairy producers at least has been the price of feed.

In the UK, dairy feed prices are down by between £20 and £25 per tonne, with dairy rations at between £223 and £237 per tonne compared to between £250 and £260 per tonne a year ago.

The price of soy from Argentina was also down by a similar amount.

In the US, feed prices were also down earlier this year although the drop in corn and soybean meal prices was partly offset by a rise in hay prices. However US feed prices were down by about 15 cents per hundredweight this spring, although some analysts are expecting a rise in grain prices his year.

EU meeting expected to bring change

At the beginning of September, the EU agriculture ministers are to come together with the crisis in the dairy industry at the top of their list.

Both the German agriculture minister Christian Schmidt and the French minister Stéphan Le Foll are to put forward an agenda of support for the sector including, it is expected, some measures for intervention.

The European farmers’ federation Copa-Cogeca has also called for direct payments to dairy farmers to be made before 1 December.

“Around €700 million will also be taken out of the dairy sector as a result of the 2014/2015 milk superlevy bill at a time when dairy farmers desperately need cash,” Cogeca President Christian Pees said.

“This should, therefore, be returned to the sector to help farmers with their cash flow problems.

“The EU intervention price must also be increased to put a floor in the market. Last set in 2008, it is nowhere near production costs.”

Chris Harris

Chris Harris



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